Will Amazon regrow its e-book jungle monopoly?

With three of the world's five biggest book publishers settling on an anti-trust lawsuit against their e-book pricing deal with Apple, Amazon looks set to re-monopolise the e-book market.

Just over two years ago five of the world’s biggest book publishers agreed to a new pricing regime for e-books, enthusiastically, that raised prices for consumers and lowered margins for the publishers. Yesterday the US Department of Justice launched an anti-trust lawsuit against the publishers as a consequence of that agreement, alleging collusion.

Three of the publishers – Hachette, Simon & Schuster and HarperCollins – have, without admitting liability, agreed to a settlement that will undermine the "agency" model the 2010 deal with Apple created. Penguin and Macmillan haven’t settled. In Europe, Apple and the publishers are in negotiations with the competition policy regulators over the settlement of a similar investigation there.

The US authorities allege the publishers’ chief executives colluded between 2008 and 2010 to raise the price of e-books, holding a series of private meetings in the private rooms of up-market Manhattan restaurants and attempting to hide their collusion by ‘’double-deleting’’ emails between them.

The establishment of the agency model was due to a combination of the publishers’ fear of Amazon’s dominance of e-books and its pricing model and the impact of the Amazon model on sales of physical books and traditional book retailers, along with the determination of Apple, which was launching its iPad, to add e-books to the iPad offering.

Amazon had been buying books from the publishers at between $US12 and $US17.50 for newly-released titles and then selling them for $US9.99 in order to grow the market for e-books – and boost sales of its Kindle e-reader. Before the agreement between Apple and the publishers, it held 90 per cent of the e-book market.

The agency model – which the publishers forced on Amazon, too, by threatening to deny it access to new releases – allowed the publishers themselves to set the price of e-versions of their titles, up to a cap of $US14.99, with Apple collecting a 30 per cent commission on its sales. That gave the publishers lower margins on e-books but narrowed the differential between the prices of their physical books and the e-versions.

The Department of Justice’s filing includes a quote it claims was made by the late Steve Jobs to his biographer in relation to the negotiations with the publishers.

‘’We’ll go to an agency model, where you set the price and we get our 30 per cent and, yes, the customer pays a little more but that’s what you want anyway.’’ And it was, with the lawsuit claiming consumers paid tens of millions of dollars more for their e-books as a consequence of the deal, which saw the price of best-selling e-books rise between $US2 and $US5 each.

The deal was very effective, although as it happened, the iPad’s success wasn’t driven by e-books. Amazon today has 60 per cent of the e-book market and Apple about 15 per cent. The biggest winner from the agency model has been Barnes & Noble, whose Nook reader has captured about 25 per cent of the market.

Those publishers that have settled have agreed to pay more than $US50 million in restitution to consumers (some US states are launching their own actions, claiming more than $US100 million on behalf of consumers), will end their agreement with Apple and will be prohibited from restricting retailers’ ability to discount e-books. That opens the door to Amazon returning to its original policy of selling its e-books for $US9.99.

The publishers have warned that the settlement will lead to a restoration of Amazon’s dominance – its near-monopoly – and, according to Penguin’s chief executive, John Makinson, undermine a model (the agency model) that ‘’offers consumers the prospect of an open and competitive market for e-books.’’ HarperCollins said agency pricing had given consumers choices of device, format and prices that wouldn’t otherwise have existed. (Perhaps it shouldn’t have made that reference to prices).

The problem for those publishers that haven’t settled or that weren’t included in the law suit (Random House didn’t introduce the agency model until a year after the five targeted by the DoJ) is that maintaining the agency model will leave them uncompetitive.

Amazon didn’t say much about the settlement but what it did say would have confirmed the publishers’ fears.

‘’This is a big win for Kindle owners and we look forward to being allowed to lower prices on more Kindle books,’’ a spokesman told the New York Times.

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